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Two business succession options for your partnership

On Behalf of | Nov 22, 2022 | Business and Commercial Litigation

You executed a partnership agreement before starting up your business in Kentucky to ensure everyone agrees on how the partnership will be structured and run. You and your partners work well together, and the business is profitable.

Still, there is always the chance that you could pass away unexpectedly. You and your partners can prepare for these possibilities by drafting a business succession plan.

Life insurance and business succession

A business succession plan is a formal agreement that, amongst other topics, lays out how a partner’s share in the partnership will be kept in the business and distributed between the remaining partners. Many business partners use life insurance as part of their succession plan.

There are two ways to address the split of life insurance funds between partners in a business succession plan: cross-purchase agreements and entity-purchase agreements.

In a cross-purchase agreement, each partner takes out a life insurance policy on all other partners. When you pass away, these policies will be paid out to existing partners based on the face value of the policy. Then these funds are used to buy out your share of the business at the price you and your partners agreed upon earlier in your cross-purchase agreement.

In an entity-purchase agreement, the partnership itself takes out one life insurance policy on each partner. This makes the partnership both the owner and beneficiary to the life insurance policies. When you pass away, the partnership uses the funds from the policy to buy your share of the business at the price you and your partners agreed upon earlier in your entity-purchase agreement.

Do not put off succession planning

When business times are good, it can be hard to remember that no one lives forever. You and your partners need a succession plan so that should one of you die, business operations can continue, and the partnership stays in the hands of the remaining partners.